 Corporate News Headline | |
| • | Larsen & Toubro plans to set up a 1,600 Mw power plant in Karnataka, a top company official said today. (BS) |
| • | Maruti Suzuki on hiked prices of several models, saying it wanted to pass on to customer's part of a rise in input costs and expenses related to complying with new emission norms. (BS) |
| • | JSW Steel plans to expand the steel manufacturing capacity at its Bellary plant in Karnataka at an investment of USD 5-6 bn, a top company official said. (BS) |
 | |
| Economic and Political Headline | |
| • | India's fuel inflation quickened in late-March and food prices climbed, making double-digit headline inflation a near certainty. The fuel price index rose 12.75% in the 12 months to March 20, higher than an annual rise of 12.68% in the previous week. Fuel costs have risen following a hike in domestic fuel prices and an upswing in world crude prices. The food price index rose an annual 16.35% in the same period, above the previous week's reading of 16.22%. (BS) |
| • | Retail sales in Germany, Europe's largest economy, fell for a second month in February as bad weather and concern that unemployment may rise kept consumers at home. Sales, adjusted for inflation and seasonal swings, fell 0.4% from January when they declined 0.5%, the Federal Statistics Office in Wiesbaden said. (Bloomberg) |
| • | An index of UK manufacturing rose to the highest level for 15 ½ years in March as exports climbed. A gauge based on a survey of companies increased to 57.2 from 56.5 in February, Markit Economics and the Chartered Institute of Purchasing and Supply said in an e-mailed statement in London. (Bloomberg) |
This is list of 10 strong future:
The daily trend of nifty is in Up trend since 16th February
 | 5290.50 | ( 0.79 %) | 41.40 |  |
| 1 | 2 | 3 | ||
| Resistance | 5309.67 | 5328.83 | 5359.07 | |
| Support | 5260.27 | 5230.03 | 5210.87 | |
 | 17692.62 | ( 0.94 %) | 164.85 | | |
| 1 | 2 | 3 | |||
| Resistance | 17747.77 | 17802.93 | 17899.29 | ||
| Support | 17596.25 | 17499.89 | 17444.73 | ||
| FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
| Category | Date | Buy Value | Sell Value | Net Value |
| FII | 01-Apr-2010 | 2405.62 | 2299.22 | 106.4 |
| DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
| Category | Date | Buy Value | Sell Value | Net Value |
| DII | 01-Apr-2010 | 1665.25 | 1212.92 | 452.33 |
Sensex (17,692)
There was a flutter of excitement last Monday as Sensex and Nifty scaled their former 2010 highs. But the benchmarks were not allowed to steady themselves at those peaks as a bout of profit booking swept them lower. Since readings from the economy, both local and external, continue to be robust, the Indian benchmarks could accomplish the feat of closing at a new 2010 high in the upcoming weeks; following in the footsteps of their global peers, some of whom have even moved on to new life-time highs.
Volumes were good in both cash as well as derivative segment last week as mid and small-cap stocks moved back in to the thick of the action. Trading interest too remains high and the open interest has already moved above Rs 1 lakh crore. FIIs too remained net buyers, aiding the positive sentiment on the bourses.
We discussed the long and intermediate-term outlook in our last column. Sensex is once again closing in on the intermediate-term resistance zone between 17,800 and 18,200 and investors ought to stay watchful as long as the index does not record an emphatic close beyond 18,500.
The medium-term trend for the index is sideways within the wide range between 14,000 and 18,000. The current up-move from February 8 trough appears to be the third leg of a flat that has the targets of 17,074, 17,954 and then 18,830. If we consider the minor counts of the up-move from 15,651, we get the more modest targets of 17,900 and 18,200.
There is a confluence of targets in the zone between 17,800 and 18,200 and the index appears on the verge of moving in to this zone. The ten-week rate of change oscillator moving above the zero line and the relative strength index at 62 point towards the medium-term trend continuing. However, it needs to be remembered that there is a strong negative divergence in both these oscillator charts.
To put it in simpler terms, there is a strong likelihood of the index moving towards 18,000. Investors with short-term perspective can ride this up-trend with suitable stop losses while long-term investors can wait to see the sustainability of this uptrend before committing fresh funds.
The index could be choppy in a narrow range between 17,500 and 17,800 for a few more sessions before breaking higher to 17,944 or 18,225. This view will be negated on a close below 17,500 and that will pave the way for decline to 17,500 or 17,337 in the near term.
Nifty (5,290.5)
Nifty moved to a new yearly high of 5,329 last Monday before declining to the intra-week low of 5,235.
The short-term trend in this index continues to be up. Formation of higher trough last week signals the possibility of another move higher to 5,323 or 5,378 in the days ahead.
Traders can buy on declines with stop at 5,200. However, breach of this level will imply that the index could decline to 5,187 or 5,080. Swing traders can hold their long positions as long as the index trades above 5,080.
The medium-term view for Nifty is sideways. But the index could push its upper boundary a little to 5,380 or 5,466. Equity benchmarks held close to their recent highs and closed the week with gains. CBOE volatility index closed the week about 2 per cent lower though it is off its recent lows implying that traders continue to feel sanguine. Commodities such as crude and base metals surged higher while dollar declined.
This sent commodity stocks soaring helping Brazil's Bovespa and Mexico's IPC to a new 21-month high.
US stocks were buoyed by strong unemployment data that took Dow to a new 18-month high. Minor counts of the move from February 5 low in the Dow imply that there is another upsurge pending in this index to 11,121 or 11,284. This view will be negated only on a close below 10,800.
Asian stocks had a strong week and breakout is observed in charts of many of the benchmarks such as the KLSE Composite Index, Hang Seng, Nikkei, Shanghai Composite and Thailand's SET. —
Pivotals
Reliance Industries (Rs 1,093.6)
It was a subdued trading week for the RIL stock. It declined to the intra-week trough of Rs 1,071 in the first three trading sessions before staging a small rebound on Thursday. We adhere to the view that the near term trend is positive and traders can hold their long positions or buy in declines with the stop at Rs 1,060. The stock could attempt to rally to Rs 1,111, Rs 1,130 or Rs 1,155 in the ensuing weeks. Supports below Rs 1,060 are at Rs 1,050 and Rs 1,035.
We will retain a positive medium term view for this stock as long as it holds above Rs 1,030 where the moving average compression of the 50 and 200 day moving averages is present. But a break above Rs 1,200 is required to signal the onset of a sustainable medium term uptrend in this stock.
State Bank of India (Rs 2,103.7)
SBI attained an intra-week peak of Rs 2,122 but could not progress beyond that level and remained in a sideways range thereafter. The short-term trend in the stock is up and it can move higher to Rs 2,141 or Rs 2,186 in the days ahead. Traders can buy in declines with the stop at Rs 2,070. Subsequent short-term supports are at Rs 2,050 and Rs 2,010.
Caution however needs to be exercised from a medium term perspective due to the presence of strong medium term resistance around Rs 2,130. Failure to close beyond this level in the ensuing weeks would imply that the stock could head lower to test the support at Rs 1,900 once more.
Tata Steel (Rs 652.3)
Tata Steel too trundled sideways last week and closed with a tiny star formation in the weekly candlestick chart denoting indecision. As we have been reiterating, the stock has strong intermediate term resistance in the zone around Rs 660 and fresh trading longs are recommended only on a close above this level. Subsequent target is at Rs 700. Short-term supports for Tata Steel are at Rs 604 and Rs 572. Fresh shorts can be initiated on a close below the first support.
Infosys (Rs 2,671.4)
Rupee appreciation against the dollar played havoc with the stock prices of information technology companies and Infosys was not spared. The stock declined to and intra-week low of Rs 2,606 before staging a small reversal on Thursday. Short-term resistances are at Rs 2,712 and Rs 2,772. Fresh shorts can be initiated on a reversal from either of these levels. Supports for the week are at Rs 2,600 and Rs 2,550. Fresh long positions should be avoided on a close below the second support.
The medium term trend in the stock remains up. A close below Rs 2,300 is required to put this uptrend under threat. —
Pivotals
Reliance Industries (Rs 1,093.6)
It was a subdued trading week for the RIL stock. It declined to the intra-week trough of Rs 1,071 in the first three trading sessions before staging a small rebound on Thursday. We adhere to the view that the near term trend is positive and traders can hold their long positions or buy in declines with the stop at Rs 1,060. The stock could attempt to rally to Rs 1,111, Rs 1,130 or Rs 1,155 in the ensuing weeks. Supports below Rs 1,060 are at Rs 1,050 and Rs 1,035.
We will retain a positive medium term view for this stock as long as it holds above Rs 1,030 where the moving average compression of the 50 and 200 day moving averages is present. But a break above Rs 1,200 is required to signal the onset of a sustainable medium term uptrend in this stock.
State Bank of India (Rs 2,103.7)
SBI attained an intra-week peak of Rs 2,122 but could not progress beyond that level and remained in a sideways range thereafter. The short-term trend in the stock is up and it can move higher to Rs 2,141 or Rs 2,186 in the days ahead. Traders can buy in declines with the stop at Rs 2,070. Subsequent short-term supports are at Rs 2,050 and Rs 2,010.
Caution however needs to be exercised from a medium term perspective due to the presence of strong medium term resistance around Rs 2,130. Failure to close beyond this level in the ensuing weeks would imply that the stock could head lower to test the support at Rs 1,900 once more.
Tata Steel (Rs 652.3)
Tata Steel too trundled sideways last week and closed with a tiny star formation in the weekly candlestick chart denoting indecision. As we have been reiterating, the stock has strong intermediate term resistance in the zone around Rs 660 and fresh trading longs are recommended only on a close above this level. Subsequent target is at Rs 700. Short-term supports for Tata Steel are at Rs 604 and Rs 572. Fresh shorts can be initiated on a close below the first support.
Infosys (Rs 2,671.4)
Rupee appreciation against the dollar played havoc with the stock prices of information technology companies and Infosys was not spared. The stock declined to and intra-week low of Rs 2,606 before staging a small reversal on Thursday. Short-term resistances are at Rs 2,712 and Rs 2,772. Fresh shorts can be initiated on a reversal from either of these levels. Supports for the week are at Rs 2,600 and Rs 2,550. Fresh long positions should be avoided on a close below the second support.
The medium term trend in the stock remains up. A close below Rs 2,300 is required to put this uptrend under threat. —
Stock Strategy: Bull-call spread on Mercator Lines
Mercator Lines (Rs 58.75): The stock has been moving in a tight band of Rs 51-61 for quite some time now. However, the outlook for the stock will remain positive as long as it stays above Rs 47. For a further up move, it will need to close above Rs 61. That can lift the stock to Rs 68-70 level. On the other hand, a dip below Rs 47 could take it lower to Rs 32-33 level. We expect the stock to trade in a narrow band in the coming week.
F&O pointers: Despite a sharp gain on Thursday, Mercator Lines futures (market lot 4,900) shed open interest. This indicates that the gain was mainly because of short covering. Options are not active in this counter. Market-wide open interest stood at about 38 per cent only.
Strategy: Traders can consider setting a bull call spread on Mercator Lines. This can be constructed by selling April 60 call, which closed at Rs 1.8 on Thursday, and buying April 55 call that closed at Rs 4.5. This will result in a net outgo of Rs 2.7 per contract.
The bull call option trading strategy is employed when one thinks that the price of the underlying asset will go up moderately in the near term.
Maximum profit can be achieved when the price of underlying is equal or greater than Rs 60, while the maximum loss can occur when underling falls below Rs 55 on expiry.
Follow-up: We had recommended a long on India Cements with a stop-loss of Rs 125 for a target of Rs 145-150. The counter closed at 135. Trader can shift the stop loss higher to Rs 132 and hold the position for another week.
Understanding IDRs
An IDR represents underlying shares of a foreign company denominated in Indian currency.
Befuddled by all those stories proudly declaring Standard Chartered Bank to be the first to use IDRs to raise money from the Indian market? Even if you do know that IDR expands into Indian Depository Receipt, what exactly does it mean? Do IDRs differ from regular stocks? In answer, here's presenting the basics of IDRs.
Back to basics
To understand, let's use the example of a Global Depository Receipt (GDR), used when an Indian company decides to raise money in the capital markets of a foreign country. A GDR is a receipt that represents a certain number of equity shares of a listed Indian company. A GDR issue is made much like your regular Initial Public Offer, involving issue of prospectus and so on. GDRs are denominated in the currency of the country in which the issue is being made, and then listed — and traded — on the stock exchange of that country.
For instance, Tata Steel raised about $500 million through a GDR issue a while ago, listed on the London Stock Exchange. Each GDR represented one share in Tata Steel. At the close of the GDR, its share capital increased by about Rs 66 crore. Each GDR was priced at $7.644 during the issue; they now are trading at about $14.5.
Unravelling IDR
Now, apply the above logic in reverse. When a foreign company uses Indian investors — such as you and me — to raise capital, it uses Indian Depository Receipts (IDR). An IDR represents underlying shares of a foreign company denominated in Indian currency. Like a regular equity shareholder, you own a part of the company, and you are entitled to dividends, rights issues and sundry such payouts that the company gives.
An IDR will be listed on Indian stock exchanges such as the BSE and the NSE, and you can trade in these much like how you would with regular shares.
The mechanism to issue shares goes like this. The foreign company that is floating the IDR will issue shares to a depository bank in India. This depository bank will issue receipts to Indian investors. However, a custodian in the company's home country holds the actual shares that are represented by the IDRs.
Now, any random company cannot decide to plonk itself on Indian markets using IDRs. Rules specify minimum requirements regarding share capital and reserves, revenues, profitability, years of operating experience, dividend policies, listing and so on. This is to protect investors from an influx of lower-quality companies. Intended issuers should also clearly specify the purposes for which the money is being raised.
Reasons and restrictions
Wondering why you would ever want to invest in IDRs? Well, for one, it allows you to invest in foreign companies without having to do a thorough homework on trading laws or practices in that country or limits on individual overseas investments.
Two, since IDRs are denominated in rupees, you are free from risks on forex fluctuations which you would undoubtedly face if you were to invest directly in those markets.
Three, you can rather easily diversify your investment portfolio to include investments in foreign companies.
Where IDRs are restricted is with regard to redemption. While IDRs themselves can be freely traded on stock exchanges, there are conditions placed on redeeming them into equity shares. An individual investor cannot redeem the IDR into a share for at least one year from the issue date. Once it has been converted, it can be held so for a maximum of 30 days, after which you would have to liquidate your holdings.
The concept of IDRs actually came about back in 2004, when the first set of rules was drafted. It was meant to encourage India as an investment hub, except that no company actually went in for it.
The recent buzz centred around IDRs came about only after Standard Chartered filed its prospectus.
Are benchmarks useful for diversified portfolios?
This column dated March 21, 2010 discussed how disclosure of alpha thesis would help both the asset management firms and the investors. Responding to the article, one reader posed us an interesting question: In the absence of clear disclosure of alpha thesis, would better benchmarks help investors identify and evaluate diversified funds?
This article shows that active funds often require custom-tailored benchmarks which are difficult to create and, hence, cannot be substitutes for disclosure of sound alpha theses. Specifically, it discusses the relevance of normal portfolios for diversified funds and suggests that investors use Information Ratio to evaluate and select such funds.
Market benchmarks
Benchmarks are used for three purposes — creating passive portfolios, evaluating active portfolios and allocating money to various asset classes. We discuss here the use of benchmarks in evaluating active portfolios.
An active portfolio is a sum of three components — market returns, style returns and active returns. Consider a mid-cap fund. The market return is the return on the broad-capitalisation S&P CNX 500. The style return is the difference between the CNX Mid-cap and the S&P CNX 500. This is the return that the investor receives for taking exposure to mid-cap style. Active return is the difference between the portfolio returns and the CNX Mid-cap Index returns. This return is attributable to the portfolio manager's skill. Such analysis differentiates the investor's risk and the risk that the portfolio manager assumes. The investor is exposed to the benchmark risk — the risk of choosing the mid-cap style. The portfolio manager assumes the active risk- the risk of deviating from the mid-cap index.
Evaluating managers based on active risk requires benchmarking performance against appropriate index. The benchmark is clearly defined for style-specific funds such as large-cap or mid-cap funds. It is, however, not so clear for diversified funds.
Normal portfolio
The portfolio manager of a diversified fund would have one or more alpha thesis. This refers to the process that the portfolio manager will adopt to exploit mispricing in securities with a view to generating excess returns over the benchmark. The excess return is typically generated from security selection. Suppose the benchmark has 50 stocks. The portfolio manager may have positive view on 10 stocks, negative view on 15 others and neutral on balance 25 stocks. She may accordingly overweight 10, underweight 15 and assign neutral weights to 25 stocks.
But what if the portfolio manager's alpha thesis assigns zero weights to 12 of the 25 stocks? For instance, the portfolio manager may invest only in stocks of companies below certain debt-equity ratio and, hence, systematically exclude certain sectors in the index. The chosen benchmark will then not be appropriate.
Performance evaluation in such cases requires creating custom-tailored benchmark called normal portfolio. This portfolio reflects the manager's typical investment process- assigning zero weight to sectors the manager typically excludes, for instance.
There are, however, some issues in creating a normal portfolio. One, it requires careful analysis of the manager's investment process over a period of time to assign appropriate weights to various sectors. And two, frequently changing the fund's manger could lead to changes in the investment style, making the normal portfolio less meaningful.
Conclusion
It would be difficult for individual investors to construct normal portfolios. Investors cannot, therefore, use benchmarks to identify funds with strong alpha thesis till asset management firms and investment consultants create normal portfolios.
But it would not be inappropriate to assume that investors wanting to take exposure to equity as an asset class would prefer passive exposure to broad-cap S&P CNX 500. Choosing a diversified fund would be meaningful only if it aligns with investor's investment objectives and performs better than the index fund. Investors can then select one with highest Information Ratio- excess returns that the fund generates over S&P CNX 500 divided by the standard deviation of such excess returns.
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Arvind Parekh
+ 91 98432 32381
